JUNE 13, 2011
Quite the start to the week. The TSX was hammered again and is not down over 9% from its highs of just a few weeks ago. The standard definition of a stock market correction is 10%, so we're closing in on that. With debt woes continuing to plague Europe, and threatening to at some point bite the US in the butt, it seems that the underlying risks to the global recovery are once again being recognized.
Those risks aren't lost on some of the best minds in economics. Today David Rosenberg boldly stated that there was a 99% chance of another US recession by 2012. Certainly it should be obvious that the US narrowly avoided an outright depression through the most dramatic means ever embraced. And Obama narrowly avoided a double dip when he extended fiscal stimulus through tax cuts and spending programs. But, as Rosie notes, and I've echoed here before, this is not a run-of-the-mill recession we are dealing with. In a typical business cycle recession, the economy can be revived through such stimulus measures. But in a recession caused by the fallout of a busted credit cycle, these stimulus measures simply act as life support. Not until the debt is paid down or defaulted on will there be lasting economic growth absent the heavy crutches of fiscal and monetary stimulus. The US has a ways to go on that front. Our turn will come.
Not to be outdone, famed economist Nouriel Roubini has reemphasized a point that continues to be lost on many economists: You can't grow an economy by building trains and other infrastructure projects to empty cities. Roubini has warned of a "meaningful probability" of a hard landing in China....certainly among the most catastrophic macroeconomic event for Canada.
From the Globe and Mail:
Mr. Roubini said investment was already 50 per cent of gross domestic product. Sixty years of data had shown that over-investment led to hard landings, he said, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.
“I was recently in Shanghai and I took their high-speed train to Hangzhou,” he said, referring to the new Maglev line that has cut travelling time between the two cities to less than an hour from four hours previously.
“The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is a also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou,” he said.
Nothing new in this warning. China has been building empty cities and spending massive amounts of stimulus money on infrastructure projects to keep the economy chugging along at a centrally-planned 10.000001% annual growth. Roubini is just one more analyst to question the sustainability of their current economy. I entirely agree. So too does Jim Chanos.
Back in Canada, meanwhile, in a prudent attempt to rein in the deficit, the new Tory majority is planning an initial cut of some 6,000 public sector jobs in a move that should shock no readers of this blog. And with the Ontario Tories pulling ahead of the McGuinty Liberals, there may be even more austerity mojo in the country’s most populous province. Expect things to get ugly!
In all, the last couple weeks have been a great reminder of why diversification and liquid, income-paying investments should be a priority for all investors and it should highlight why the next decade will be nothing like the last. The headwinds lined up against the global economy are intensifying.....and Canada has not yet begun its own credit deleveraging. Interesting times, indeed.